Two words: gambling log.
The whole story of gambling and taxes, including how to prove your losses, is covered in our book A Gambler's Guide to Taxes by Jean Scott and Marissa Chien (which will be available in the next month or so). But here's the story in a nutshell.
IRS publication 529, under the topic "Gambling Losses Up to the Amount of Gambling Winnings," says, "You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information:
• The date and type of your specific wager or wagering activity. • The name and address or location of the gambling establishment. • The names of other persons present with you at the gambling establishment. • The amount(s) you won or lost. • Proof of winnings and losses.
Other supporting evidence to go with your diary, besides what's specifically mentioned in IRS guidelines, can be credit-card records, hotel receipts, airline tickets, casino markers—paperwork that shows you were actually in the place where your diary says you gambled on a particular day.
It's all a little vague, so it's up to you to bear the burden of proof. Another IRS document, Revenue Procedure 77-29, says, "The record-keeping suggestions set forth [in this ruling] are intended as general guidelines to assist taxpayers in establishing their reportable gambling gains and deductible gambling losses. While following these will enable most taxpayers to meet their obligations under the Internal Revenue Code, these guidelines cannot be all inclusive and the tax liability of each depends on the facts and circumstances of particular situations."
The main thing is to faithfully record all your gambling information: dates, locations, wins, losses, and supporting evidence. It’s not the easiest thing in the world to do, but it’s critical when you have gambling income to report.
Marissa Chien, in A Gambler's Guide to Taxes, sums it up best.
"A good gaming log is hard to keep up to date. When you finish gambling, you’re often tired, maybe a bit bug-eyed, or even intoxicated. If you’ve won, you’re on a high and want to celebrate, not write in a log. If you’ve lost, the last thing you want to do is record it for posterity. Perhaps, if you think about it at all, you figure that, whatever your result, you’ll remember it if a time ever comes when you need to. Or you actually do write down your result—on a cocktail napkin that comes clean in the wash. Or you actually record your win or loss in a small spiral-bound pocket notebook, the kind reporters carry around, but you don’t note enough details of your gambling session to appear authentic in any IRS audit.
"Sure, keeping a log isn’t easy. But trust me on this: It’s easier than having to pay more in taxes than you’re liable for, or worse, trying to justify a claim of gambling losses, without adequate documentation, to a steely-eyed bean-counting representative of the U.S. government."
